How Not to Surrender Your Retirement Spending Money to the Taxman


They say that the only two inevitabilities in life are death and taxes. While your golden years might see the former looming, there are ways to make sure the latter doesn’t rob you of your savings.

Many people assume that their taxpaying years are over once they reach retirement age. This, unfortunately, is not the case. Social Security benefits may be taxed, as may any money you take out of a 401(k) or traditional IRA. Other investments, such as business ownership or stocks and bonds, can also get you in line for taxes on capital gains and dividends.

So, what can you do to keep your money out of the taxman’s pocket?

Use a Roth Individual Retirement Account (IRA)

The difference between a standard IRA and a Roth IRA lies in the taxes. It’s not that you escape them entirely as the IRS needs to get its pound of flesh from you. What distinguishes one from the other is when you pay the tax.

With a regular IRA, you don’t pay tax on your contributions while you’re making them. However, when you withdraw money from that account, you’re liable for taxes. With a Roth IRA, your contributions are taxed before they go into the account, and your withdrawals are tax-free. You take the tax hit now to avoid it later when you’re retired.

Ask your financial adviser about a Roth IRA and how to convert your current IRA into a Roth IRA. Some employers offer a Roth 401(K) as well, where the same principles apply. 

Look after your health

When you qualify for Medicare, you have to pay premiums to use the coverage under Parts A and B. Medicare doesn’t pay 100% of your bills, though, which is why many people use Medisupps to find a Medicare Supplement Plan that provides them with the additional coverage they need. The premiums vary according to which plan you select. Some plans even cover the Parts A and B deductibles as well.

Speak to a tax specialist about whether you can deduct your Medicare premiums when you file your taxes. There are some requirements to qualify for this opportunity, but few people take advantage of it because it’s not something they know about. 

You should always keep a comprehensive list of medical expenses with supporting documentation, as you may be able to claim some of them back from the IRS.

Keep expenses down

The more money you are taking out of your IRA or 401(K) every month to cover your expenses, the more tax you are liable to pay. As you near retirement age, make arrangements to reduce debts, such as a mortgage. 

If your house is paid for by the time you retire, you won’t need to withdraw mortgage repayment money each month. Any debt that you can settle before retirement is to your advantage.

Remember that taxes are proportionate to your income. If you make larger withdrawals during years where your income is low, you will pay less tax. Get input from a tax adviser on how to time withdrawals to minimize the tax you’re compelled to pay.

Use other investment vehicles

Putting your money into an annuity gives you a fixed income you can depend on as it isn’t market-related. The periodic payouts are tax-free. You might not have easy access to the money if you need more than the regular payment, but there are ways to work around that, such as selling your payments.

Municipal bonds are also tax-exempt at the federal level and even at the state level in some states. The income you earn, therefore, could be 100% tax-free.

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